Why I’m glad I was wrong about Wednesday’s bounce

Free After-Hours Analysis: 

The S&P 500 tumbled 2% Thursday, giving back all of Wednesday’s gains.

As they say, easy come, easy go. This remains a volatile market and that means oversized moves in both directions.

The nice thing about Thursday’s selling is it didn’t crash through recent lows. The bad thing about Thursday’s selling is…it didn’t crash through recent lows.

As disappointing as Thursday’s implosion felt following Wednesday’s super encouraging bounce, this still doesn’t count as real capitulatory selling because we didn’t crash through support and fall in one of the biggest losing sessions of the entire pullback.

Now, that doesn’t mean we don’t need capitulation to bounce, but it sure helps.

As for my latest trade, as I wrote Wednesday evening, I liked that bounce and bought it. While that sounds like a huge mistake given how Thursday turned out, it really wasn’t all that bad.

A big part of my trading strategy is buying bounces early and that meant jumping aboard Wednesday’s bounce not long after the open. And it’s a good thing I got in early because Thursday’s poor open was still above my initial entry points, meaning those positions hadn’t even turned red yet.

And just because I bought Wednesday’s bounce doesn’t mean I was naive to the possibility it could fail. In fact, I was fully prepared for Thursday’s retreat. As I wrote Wednesday evening:

Odds are good this bounce will fizzle and we will get to do this all over again in a few days, but since I have no way of knowing if the first, second, or third bounce attempt will turn into the real one, the only thing I can do is buy all of them. Start small, get in early, keep a nearby stop, and only add to a trade that is working and our risks are actually quite low. If this doesn’t work, no big deal, I pull the plug and try again next time, but so far so good.

Hope for the best, prepare for the worst. There is no better way to navigate markets.

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As for what comes next, well, as I alluded to above, I would love to see one last dramatic wave of capitulation selling before bouncing. That will confirm the bottom is in and set up a fantastic buying opportunity.

Barring that capitulation, the only thing we can do is simply wait for the next bounce and try again. (Start small, get in early, keep a nearby stop, and only add to a position that’s working.)

As much as it seems like Thursday’s decline was bad for me, I actually don’t mind. In fact, I revel in the opportunity to buy stocks at even lower prices. Only amateurs get discouraged and give up. Savvy traders pull the plug and get right back after it.

If we don’t bounce Friday, then look for one on Monday. And if not Monday, then Tuesday or Wednesday. As dramatic as the selling has been, the market loves symmetry and the inevitable rebound will be equally impressive.

Make sure you don’t miss out because it will be some of the easiest and fastest money you make all year.

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